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The Swedish third way: an assessment of the performance and validity of the Rehn–Meidner model

The Swedish third way: an assessment of the performance and validity of the Rehn–Meidner model

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Published by Stefano Ambrosini
The Swedish third way: an assessment
of the performance and validity of the
Rehn–Meidner model
The Swedish third way: an assessment
of the performance and validity of the
Rehn–Meidner model

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Published by: Stefano Ambrosini on Mar 15, 2014
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The Swedish third way: an assessmentof the performance and validity of theRehn–Meidner model
Lennart Erixon*
This paper analyses the functioning of the Rehn–Meidner model in Sweden and thevalidity of the model’s underlying theory. Both sceptics and friends of ‘the Swedishmodel’ have exaggerated the effects of active labour market policy and solidaritywage policy on employment, inflation and growth. However, these policies havecontributed to the reduction of hysteresis effects and wage differentials in Sweden.Furthermore, Swedish experiences confirm the Rehn–Meidner view that positivedemand shocks and expansionary macroeconomic policies make it difficult tocombine full employment with price stability, economic growth and equity even if central wage negotiations are coordinated and trade unions willingly accept wagerestraint.
 Key words
: Rehn–Meidner model, Wage policy of solidarity, Labour market policy,Phillips curve, Productivity growth
 JEL classifications
: E31, E63, J31, O11
1. Introduction
During the early post-war years, two Swedish trade-union economists presented a uniqueeconomicandwagepolicyprogramme,theRehn–Meidner model,aimedatcombiningfullemploymentandfairwageswithlowinflationandhigheconomicgrowth.
RudolfMeidnerwas then the head of the Economics Research Department of the LO (The SwedishConfederation of Trade Unions, The Swedish TUC) and Go¨sta Rehn was the depart-ment’s leading macroeconomist. The Rehn–Meidner (R-M) model recommends a re-strictivemacroeconomicpolicy—principallyindirecttaxation—togetherwithawagepolicyofsolidarity andanactivelabour marketpolicy.RehnandMeidner did notinvent anactive
Manuscript received 17 November 2006; final version received 20 October 2007.
 Address for correspondence
: Department of Economics, Stockholm University, 106 91 Stockholm, Sweden;email: lex@ne.su.se*Stockholm University. Numerous social researchers have made constructive comments on earlierversions, not least the late Go¨sta Rehn and Rudolf Meidner and the participants in a Nordic network oneconomicpolicywithLarsMjøset,OsloUniversity,ascoordinator.Inparticular,Imustmentionthevaluablecomments on the last draft by Eva Skult, Birger and Erika Viklund. A longer version of the paper, includingaformalisationof thewageandproductivityfunctions intheRehn–Meidner model,canbeacquiredfromtheauthor.
See Meidner and Rehn
 et al.
, 1953 [1951]; Rehn, 1952A [1948], 1952B [1950], 1969, 1982, 1987;Hansen and Rehn, 1956; Meidner, 1952 [1948], 1969; Lundberg, 1985; Erixon, 2000, 2001, 2004 [2002],2005.
Cambridge Journal of Economics
 367–393doi:10.1093/cje/bem051Advance Access publication 6 December, 2007
The Author 2007. Published by Oxford University Press on behalf of the Cambridge Political Economy Society.All rights reserved.
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labour market policy or a wage policy of solidarity. However, these policies were parts of a strategy to satisfy all four objectives of post-war economic policy. Furthermore, it waseasierfor representativesoftradeunionsandSocialDemocraticgovernmentsinSwedentosupport and win acceptance for awage policy of solidarity and mobility-stimulating labourmarket policy if they could provide good arguments for these policies leading to higheconomic growth and modest inflation. Each mean in the R-M model had more than onepurpose and also the intent of making other means more effective. This interaction makesit difficult to selectively reject parts of the R-M model. For example, a wage policy of solidarity must be backed up by both an active labour market policy and a restrictivemacroeconomic policy. Both adherents and critics of ‘the Swedish model’ have overlookedthe comprehensive and coherent nature of the R-M policy programme.Theaimofthispaper istoevaluatethefunctioningoftheR-MpolicymodelinSweden.
The paper also addresses the question of whether the economic development in Swedensupports the underpinning of macroeconomic theory by the model. Section 2 providesa brief account of the R-M policy model and also of its underlying economic theory.Sections 3, 4 and 5 discuss the performance and validity of the model in terms of Sweden’sability to achieve wage equity, macroeconomic stabilisation and economic growth.
2. The content of the Rehn–Meidner model
2.1 Macroeconomic stability, growth and equity
The original R-M model advocated a tight fiscal policy to control inflation. Rehn andMeidneralsoconsideredrestrictivemonetarypolicyandrevaluationasdeflationarymeans.A tight macroeconomic policy was expected to keep wage increases down in peakconditions, but also in the medium term; although wage growth would be stimulated bya full employment policy. This would be counteracted, Rehn and Meidner expected, bya squeeze on profit margins (see below). The R-M model recommends a medium termrestrictivefiscalpolicynotonlytocontrolinflationbutalsotoredistributeincomeinfavourof labour and increase public saving at the expense of company. Rehn and Meidnerpreferred public saving for income and wealth distribution and industrial policy reasons.These objectives make public saving the least market-conforming component of the R-Mmodel. Full employment is achieved in the R-M model through selective policy instru-ments, rather than through expansionary macroeconomic policies. In this paper, the term‘selective employment policy’ will include not only active labour market policies but alsomarginal employment subsidies, which Rehn came to argue for from the 1970s. He hopedthat subsidies for employment increases and new investment would reduce both un-employment and inflation by encouraging price reductions. Rehn also expected thatemployment subsidies would exert downward pressure on wages by reducing the profitmargins of firms not qualifying for the subsidies. Rehn’s final proposal was that subsidiesshould be made permanent and offered to all expanding firms and for all kinds of labour.In the original R-M model labour market policies were the main instruments forpreventing restrictive fiscal policy increasing unemployment. Moreover, ambitious labourmarket policies guaranteeing full employment explain the downwards rigidity of nominalwages in the model. These measures have three elements: supply-side retraining,vocational education and relocation grants; actions to improve labour market matching;
The application of the R-M model in Sweden is analysed in (Erixon 2001, 2005). Appendix 1 surveyseconomic-policy regimes, central governments, structural conditions for economic and wage policy andimportant macroeconomic shocks in Sweden during the post-war period.
368 L. Erixon
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and targeted demand-side policies designed to increase demand for labour in certainregions, industries and firms. All in all, Rehn and Meidner put greater emphasis onmobility-enhancing policies (including supply and matching-oriented measures) than job-creation measures (Meidner and Rehn
 et al.
, 1953 [1951], pp. 92–3). The purpose of labour market policy was not only to maintain full employment and combat inflation byputting downward pressure on profit margins; but also to counter inflationary bottlenecksinthelabour marketandsupportstructural changeinthebusiness sector.Aspecific taskof mobility-enhancing labour market policies in the R-M model is to support solidarity wagepolicy in building a fair wage structure and fostering structural change. A wage policy of solidarity—achieved by coordination of central wage negotiations—means equal pay forwork of equal value irrespective of the profits of firms and industries. Wage differencesshould reflect objective differences in working environment and job content. In fact,solidarity wage policy is an instrument anticipating a long-run equilibrium in the perfectlabour markets of orthodox economists.According to the R-M model, the wage policy of solidarity is compatible with economicgrowth.Equalremunerationforidenticaljobsestablishescostpressureonlow-productivityfirms, requiring them to increase productive efficiency or die. The closure of inefficientfirms enhances average productivity, both directly and indirectly, by freeing resources forthe expansion of more dynamic firms.Furthermore, awage policyof solidarity strengthensincentives for structural change by inducing larger profit differentials between industriesand firms. However, wage solidarity for structural change will be muted without activelabour market policy and restrictive macroeconomic policy to encourage labour mobilityand contain overall profit margins. Moreover, these policy measures are necessary forattainingfairwages.Expansionarymacroeconomicpoliciesriskacceleratingwagedrift(i.e.wages increase outside central agreements) and widening wage differentials, especiallywhen labour markets are sluggish. On the other hand, high unemployment made it easierfor low profitability firms to survive by paying low relative wages. According to the R-Mmodel, therefore, a wage policy of solidarity requires full employment but by means of minimising wage drift.The R-M programme is an alternative to a ‘free’ market model of structural change inwhich labour mobility is induced by wage differences. Rehn and Meidner argued that largewage differentials, required to overcome inertia on labour markets, are not only unfair butalso inflationary. Widening wage gaps can seldom beachievedthrough absolute reductionsof nominal wages, and they risk inducing wage demands to restore differentials. Thus, therole of wage solidarity in the R-M model is not only to achieve greater equity but also tocontain inflation by helping to prevent wage–wage spirals. The wage policy of solidarity isalso supposed to hold back wage increases in profitable companies willing and able to payhigher wages. In fact, in the original R-M model, a wage policy of solidarity is the maininstrument for preserving wage stability and preventing a further fall in profits shares of gross domestic product (GDP), after the initial profit squeeze, as a consequence of fullemployment policies.
2.2 The Rehn–Meidner model in macroeconomics
The R-M model was an alternative to a Keynesian economic policy practised in Swedenduring the early post-war years (see Appendix 1). The post-war Keynesian solution to theunemployment-inflation dilemma is linked in this paper to expansionary general economicpolicies, primarily fiscal policies or devaluations, combined with regulation and selectiverestrictive fiscal measures targeted at rising prices. The R-M model’s restrictive economic
Performance and validity of the Rehn–Meidner model 369
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